Vermont Legislature SmartTranscripts:

[Mark Langen]: We are live. Alright. We are

[Sen. Nader Hashim (Chair)]: back in senate judiciary, switching gears with the forensic facility to talk about the uniform disclaimer of property interests bill

[Mark Langen]: that we have. And we have

[Sen. Nader Hashim (Chair)]: Mark here

[Mark Langen]: to testify. And, yep, the floor is yours. Okay. Thank you, senator. My name is Mark Langen. I am the chair of the probate and trust law section of our association. I've been here many times before. Brought to the Uniform Trust Code. Brought to the Uniform Power of Attorney and Digital Access Act. So a number of acts. And now I'm bringing you the Uniform Disclaimer Act. And the head of our subcommittee, Nader Kim, has already testified. Thank you for giving me an opportunity because I just want to explain to you very briefly why I think it's important you should pass this act. Let me give you a little history. First of all, disclaimers. Disclaimers are basically saying, I don't want your gift. I don't want your inheritance. And you may not want it for a number of reasons. Number one is it's toxic glam. You may say, I don't need it. And if I disclaim it, it'll go to my kids. Okay. So disclaimers have been around for centuries. Okay? And then what happened and we actually had a uniform disclaimer act before 1976. 1976 is very important. It's when congress passed the tax reform act of '76. And in it, they put a provision, a disclaimer provision in the gift tax section saying, if you're gonna disclaim that and you don't wanna treat it as a gift, you've gotta follow some rules. And those rules are, number one, you gotta do it nine months within the interest being created. It's gotta be in writing. You can't be taking an interest in it. You can't be taking the income for it and say, oh, no. I don't want it now. And you'd have to deliver your disclaimer, that written offender, to the person who's transferring to you. Okay? So they did that in '76. Right after that, '78, the Uniform Loss Commission put out a revision to the Uniform Disclaimer of Property Interest Act. And basically and we passed it in '86 in Vermont. But what they did back then is they said they basically adopted that section of the code and say, this is the only way you can make a disclaimer. You have to do it in writing within nine months of the interest being created. Okay? And they said that's the only way you could do it. So they crowded out. It should matter. What if you don't care if there's a gift? You know, the tax consequences of it is one thing, but to have a statute that says you can't even disclaim you're too late is another thing. It's it's it's it's pigeonholing everybody into the tax regime. You see? And so that's why if for nothing else, that's why this disclaimer act is an improvement because it allows you to disclaim. There's no nine month deadline anymore. You can disclaim whatever. Now that doesn't mean you might have adverse consequence consequences. Okay? And here's and here's why it's important now. Because, yes, you may have made a gift. You say let's say it's ten months and you and you say I want a display. And under the tax code, it will be considered a gift. So what? You got a $15,000,000 exclusion you can use up and you're probably never going to get paid with it. You know? So we should have the freedom to be able to disclaim after the nine month period. You know? And it it may have gift tax consequences, but most of my clients don't care.

[Sen. Nader Hashim (Chair)]: The the gift ex the 15,000,000 is the gift exclusion? Meaning that it's It's

[Mark Langen]: a gift and estate exclusion.

[Sen. Nader Hashim (Chair)]: So if it's above 15,000,000, then no matter what, you're going to to pay taxes on it. Is that

[Mark Langen]: what you're saying? Correct. If you're up your exclusion. I'll digress for you for a sec. Here's what happened. Back in the late seventies, the estate tax was higher rate than the gift tax. Okay? So if you could if you knew you were gonna die, wouldn't you be smarter to gift it away before you die? So that's the case my grandpa took out his swallowing food to my grandmother on his death and, you know, thinking you made a gift. You know? So what happened is the congress so people were doing that. And congress got they said, oh, this is cheating. We gotta plug up this hole. So what they did is they passed a three year rule, and they said that if you make a gift within three years of your death, we're gonna bring it back in this if it was made in contemplation of your death, we're gonna bring it back in the state. And so that was 2035 of the code. And what happened is the IRS was pulling back every every kid, every you know, regardless. Well, a number of people got off about that. They said, my parents died in a car accident. They didn't die in contemplation. This was not made in contemplation of death. And so the courts got swamped with these cases, and they didn't know what to do about it. So congress went back to the drawing map, and they said, look. We're gonna take we're gonna do away with this problem. We're gonna make the rates the same, and we're gonna have one exclusion, and that exclusion back then was a $175,000. And it doesn't matter whether you make a gift or if you you give it when you die, it's gonna eat into that exclusion. Of course, now we have a number of little exclusions. Government doesn't wanna be bothered with every birthday gift. You know? So they said, we're gonna let you make an annual gift per year per donee of $3,000. You know? And don't tell us about it. Don't file a return. You know? You can that has since moved up to $19,000 per year per donee. Okay? So and there are a couple others. You can make your tuition. You can give give a med on top of that without even telling the service about it. But once you go over that $19,000, you must eat into your exclusion. One guy said, no. No. No. I wanna pay the tax. I'll pay the gift tax right now, I and wanna keep my exclusion in place. Service said, no. No. No. No. You've gotta eat your exclusion. No. Why did the service say that? Because when you make a gift, the donor makes the gift. The donor has to let's say they make a gift of a 100,000. They gotta come up with extra money to pay that, and that gets it out of their estate. But when you die, you have to pay your estate tax on the very dollars that are in your estate. So it's an inclusive tax. And so the government makes that makes that better in that situation. So we've had this incredible increase in the exclusion since 2019. Trump signed into office the Tax Cuts and Jobs Act where we went from five and a half up to 11. We've gone up by inflation since then. And then with the the recent tax act, we were we were close to it, but we're now at $15,000,000 per person. So Mary Tuggle can give away 30,000,000 to the next generation without incurring the estate tax. Now here in Vermont, we have a $5,000,000 exclusionary. So we can pass close to 10,000,000. But I'm Okay. There's I have a question. I'm

[Sen. Nader Hashim (Chair)]: wondering about if the person who wants to disclaim something with this bill as it's written, they can disclaim it whenever. Right? Correct. And can they still gain interest and potentially generate income from whatever that potentially disclaimed

[Mark Langen]: items? Of those four requirements that I said that were in for the gift tax, it's only the nine month. So you can't be taking an interest and then say, oh, I've had enough. I'll disclaim it now. And once you take an interest, you've you've accepted the gift, and therefore, you can't spend. So you can never touch the gift. You know? And it's gotta be in writing, and it's gotta be delivered to the transfer. Okay? Yeah. So those are still but let me explain to you how how in a way, how how difficult this is as far and where we where our statute falls down. So let's say you have a trust. There there actually two cases, and they both dealt with the families that owned three ms. They had these trusts, and they went for the surviving spouse's life and then upon the death of the surviving spouse, the remainder went to the kids. And one said, well, we only found out about it when his mother died that he was gonna be getting all this money. And he said, I wanted to explain that. And the service said, too late because your remainder interest vested when your father died. And that's when the clock started ticking. Even though you didn't know about it until your mother died several decades later. You know? So sometimes the person who it's not when you find out you get an interest, it's when the interest is created. And therefore people were excluded from being able to display. Under our act, there's one section where it says that if it's a testamentary act, like a will, then, you know, once that interest is created, you've got nine months to disband. Otherwise, you're boxed out. So I've got a case right now where it took forever for us to hit this this estate open. And now I'm told by my paralegal. I mean, it took a year. And now I'm told by the paralegal it was a gift to a museum of a piece of art. And and they said, well, we we don't know if we'll accept it. Well, guess what? It's too late under our statute because the interest was created when they died. And even though we had it took us a year to get the will allowed, that interest was created. It's too late for them. So this act would open that up, the nine months. And plus, the care, if there's gift tax consequences because they are. They don't pay gift taxes. Only individuals do. People

[Sen. Tanya Vyhovsky (Member)]: can give away 5,000,000,000 or maybe $10,000,000,000 and and not have any of that taxed?

[Mark Langen]: It's not subject to yeah. The The state tax. Well, you you have to eat up your exclusion. So let's say you decide to give away $5,000,000 to your kids. You must file a seven zero nine on the April 15 in the year after the death and say, hey, IRS, I'm using up my $5,000,000 of my $15,000,000 But

[Sen. Tanya Vyhovsky (Member)]: in the state of so that's federal, the 15,000,000, which is insane. But at the state level, we can transfer 5 or $10,000,000 with nobody paying taxes on it.

[Mark Langen]: We have no gift tax in Vermont, nor does any other state.

[Sen. Tanya Vyhovsky (Member)]: Oh, interesting.

[Mark Langen]: So that that's you know, that's it is a very so what we we do have an estate tax. Only 20 states in The United States have an estate estate tax. 32 now. We're we're one of the few, and most of them most of them are in the Northeast. But if someone gives assets away, then that is out of their estate if they give it at least two years before they die. So so that that's a key thing for planning around the Vermont estate tax. But oh, so so I'm giving you the the crucial reason why you should assess that because we should allow people and institutions to be able to explain even if the nine months has gone by. We shouldn't be shackled by the tax reason. Let the tax reasons be what they are because they're really non consequential. But if you'll I I will tick off if you want some other reasons why I think that it's it's a good read. You know, it's a better act than what we've got. Let me just I I can go through this really quickly. Number one is you can disclaim ahead of time. Your parents aren't dead yet. You can still you can you can prepare your display right now under the app and and get it done. There are clearer rules with regard to when you disclaim joint property held as joint tenants with rights to private ship and intense funding. For example, let's say that Jim puts 60% of the money in the checking account and Amy puts 40% and it's joint tenants with rights to private ship and Jim dies first. What can it's really unclear under act. What can what can Amy disclaim? 50%? Because there's two owner or 60%? The act makes it clear 60% That's when we look at the consideration for much better it's much more complicated rule explaining which which our current standard doesn't do. It allows you to let's say the trustee has a power of appointment. And it says, I'm giving my kid this share, and it will go and trust for them for their life. But when they die, it will go according to the way that they find they can appoint who it goes to. And so this act allows the people who are the appointees under that to decide at that point. So that that's not in our that's a that's a new there's no equivalent in the current current act. Our stat statute now allows only executors and guardians to display. This would add trustees and agents under powers of attorney. So I think that's a that's a a improvement. This statute would allow parents to display for their children if they if there's no conflict of interest, economic conflict of interest and stuff like that. We don't have that in our current statute. There's there's no equivalent right now, so there would be improvement. It allows oh, it's much it's much much more clear about what happens if you want to exercise a disclaimer for your mother or your your mother wants to do it, but she can't sign anymore. She's lost her ability to sign. This this it has an equivalent provision to the wills that said that they can you can you can ask someone to sign for you. That's not in the current statute. This statute says if you said, hey. You know, disclaimer, it's not all or nothing. You can disclaim half. You can just spend up from percentage or half. And and if you want, I've I've jotted down where you can find this in the hand if you wanna stop me to the intent. Just give a couple more. Oh, I think this is just brilliant. If you disclaim and it says something that let's say you have an IRA and it says if you disclaim, it goes to your state. Well, then you've tossed all these assets into probate. Well, what this act would do is say, no. No. No. No. It doesn't have to go through probate. It can go to the beneficiaries of who would take under your will if it did go through probate. You can just skip over the whole probate process. This statute only talks about I said that one of the requirements is that the writing has to be delivered through the transferor of it. And so there was only in the current statute, it only deals with the delivery with regard to real property. This statute is much better because it's more robust. It talks about, well, what if you're disclaiming an IRA or what if you're disclaiming an annuity or an insurance policy? It deals with all sorts of different things. Big improvement. And this asset also incorporates the electronic signatures act, which is super important nowadays because I find that my clients ask me, do I have to have the wet ink original to give to the the bank? And the answer is no. Not anymore because we passed the statute. If you have a PDF and it's got a statute, that's a legal legally binding signature. So this you can control what happens upon disclaimer in an instrument in which our statutes currently not it doesn't have that. So for example, I have some clients, and they have two daughters. One is negligently wealthy, and the other one is not. And the the one who is, she just called me and she said, you know, if I if I if I explain, it'll I just wanted to go to my sister. You know? I because my kid was reaching out. And I said, well, it's not quite how it works because I bet you in their document, it says if you disfain, it's going to your kids. You know? So we're have to do we can deal with the parents, the parents will say, hey. If she disclaims, it's going to the sister. Not not done with bloodline. And one other thing is this makes clear that when you do disclaim, it's not a transfer. Why is that important? Because if you're displaying real property, what would the transfer tax do? This makes it clear. It's not clear under our current state. So it's not a transfer when you do that. Now there's an exception to rule probably for Medicaid. What what's what's happening on the back end is I had a client who was on Medicaid and then someone died and left him a big inheritance. Can they disclaim so they can stay on Medicaid? The answer for Medicaid purposes is no. No. And that is like, if you got it, you got it. You go off Medicaid until you would've used it up. So there are but that's coming in from a different direction. So

[Sen. Nader Hashim (Chair)]: I'm not trying to make this more difficult, but I suspect which I'm fairly confident this would have to also go through Senate Finance based on some of the things that I've heard here. I don't know if that's Senate Finance is What's your thought on this?

[Mark Langen]: Just to me offhand, if it affects the revenues of

[Sen. Christopher Mattos (Clerk)]: the state, which it sounds like it may potentially

[Mark Langen]: because of No, I don't think that well, first of all

[Sen. Christopher Mattos (Clerk)]: Because if you miss the timeline and you can't disclaim, you get a bunch

[Mark Langen]: of

[Sen. Christopher Mattos (Clerk)]: money

[Mark Langen]: and it's over $155,000,000 or 10,000,000,

[Sen. Christopher Mattos (Clerk)]: depending if it's your parents, then there would be a tax due. Right? If you weren't able to disclaim.

[Mark Langen]: Mean Yeah. No. No. Because a lot of times when you disclaim, it's need to

[Sen. Christopher Mattos (Clerk)]: be a gift,

[Mark Langen]: and we have no gift

[Sen. Christopher Mattos (Clerk)]: tags. True.

[Mark Langen]: So I think it's totally. I don't think it's gonna affect our conference at all. I mean, the planning that's done, you know, I mean, we can do some planning that what we need to do what what our major challenges as a state planners with people with large estates is my big one is with with our exclusion, we still have the rule. If you don't use it, you lose it. So let's say you have a couple with $10,000,000. One's got 7,000,000 and the other's got 3. If the person who dies first has 3, then you've lost $2,000,000 for excluding your kids. Because if you don't use it, you'll lose it. So that used to be the rule at the federal level. But in 2010, they passed what we call portability at the federal level, which had been an idea that was kicking around since 1980 with Reagan. They couldn't figure out, like, do we how do we deal with this? I mean, because we don't want we guys want the widows being like bumblebees to flower and picking up exclusions from deceased husbands.

[Sen. Christopher Mattos (Clerk)]: You know?

[Mark Langen]: So finally, congress got around to it. 2010, they said, look. If you don't use all of your $15,000,000 exclusion, you can take the unused exclusion from your deceased spouse and tack it on to your basic exclusion of 15,000,000. So you might have a 20 or 30. Yeah. I had a client who I think the exclusion amount was about $11,000,000, and the wife died first. And she left everything to the husband, marital deduction, and she didn't lose any of her exclusion. And then he died second. So he but but fortunately, because of portability, we just tacked it down to his estate. And so we, you know and because the concept was with congress was, hey. You should be able you shouldn't have to do all this plan, you know, jury and mandarin of your of your assets so that you use it. You know, we'll we'll give you the portability. If your spouse can use it, you can use it. And in 2015, when I worked on the state tax under the administration, I I try to get them to have portability at the state level, but they said, not revenue neutral. You know? I don't know how they came up with that. But so we so that's our thing. But you can plan around that. We get our our clients a $7,000,000 person to give $32,000,000 to the other spouse so they both get 5,000,000. If either die, we can we can use up the exclusion. But but that's, totally within the boundaries of the Texas.

[Sen. Nader Hashim (Chair)]: Are there any language changes that you would recommend for this bill as it's written right now?

[Mark Langen]: No. I think I sat on the committee that drafted it, and we went through it pretty carefully. And so I think we're it's it's a pretty good statute to go.

[Sen. Nader Hashim (Chair)]: The the only thing that I I would want to change is the just if redundant is the severability severability clause. We do already have that in statute, that kind of a blanket A blanket clause.

[Mark Langen]: A separate 15. Okay.

[Sen. Nader Hashim (Chair)]: It's the I think it's one. Yeah.

[Mark Langen]: It's the entire one. Two fifteen?

[Sen. Nader Hashim (Chair)]: Yeah. Yeah. So I think that's just

[Mark Langen]: Yeah. I'll point out. I think it is, like, the fourth section. It's very it's very slide. It says, we're not we're not replacing the common law here. So it took the Uniform Laws Commission. This is a standard provision in all the uniform acts and saying, hey. Even though we're like the Uniform Trust Code, we're we're filling in some of the gap. We're making statutory changes here, but the common law is still in place except to the extent that we've overwritten it with our statute. But if there's anything outside there, the common law is still in place. And that's what we need in this act too instead so that you can do your common law disclaimer even though it's past the nine months nine months. There may be taxes, but most people won't care. I

[Sen. Tanya Vyhovsky (Member)]: appreciate your thought that we can take out the severability clause. But generally, we put things in don't we talk about severability clauses when we're worried that something in the bill may be unconstitutional? So what is in this bill that we're worried may be unconstitutional?

[Sen. Nader Hashim (Chair)]: I don't know. I think that's a thing.

[Mark Langen]: The the uniform laws commission puts in every single uniform law. Okay. Yeah. Yeah. It's just for uniform laws. Why is for me?

[Sen. Tanya Vyhovsky (Member)]: Because I'm like, we never talk about doing that unless there's something on conflict.

[Mark Langen]: Okay. Yeah. Yeah. So So, Okay. Alright. So Eric, if you don't mind

[Sen. Nader Hashim (Chair)]: taking up several of these

[Mark Langen]: things on this. Right. Right. Can I

[Sen. Nader Hashim (Chair)]: just add one thing? Yes.

[Mark Langen]: There was there was an email from Matt that was recommending one technical change that said that the committee noticed a potential ambiguity. Forty one five. Right. Right. I I remember I was on an email. It's

[Sen. Christopher Mattos (Clerk)]: know about that. I don't know about about that. I

[Sen. Nader Hashim (Chair)]: Alright. So

[Mark Langen]: We don't expect the crossover date.

[Sen. Nader Hashim (Chair)]: No. We do. It's the thirteenth.

[Mark Langen]: That's what we follow. Oh, it's at thirteen. Yeah. Wow. '13. Okay. It's always on the. Yeah. We can. Maybe I'll ask

[Sen. Christopher Mattos (Clerk)]: Chair Cummings if it's finance. Finance has an extra. No, know. But this bill.

[Sen. Tanya Vyhovsky (Member)]: I see. To take a peek and Yeah. See if it should would go there. Yeah. Bloomberg might also be a good person to check-in with. Because sometimes they have a sense that a bill might need to go to finance or appropriations. Once it gets to the committee, they're like, why is this here?

[Sen. Christopher Mattos (Clerk)]: It actually happened once

[Mark Langen]: this week. So one point I would make is that what's happened is that we passed this 1978 act in '86. And what happens is when the uniform axis, you know, issues percolate up. You know? And so this is just a modern a modernization of an act that we already have, and it's just tweaking it down the It's not a big major change.

[Sen. Nader Hashim (Chair)]: I wanna make sure we ask

[Mark Langen]: We got Mattos. That's all I was looking for. Maybe I don't want to go to finance, so I know I do both of them.

[Sen. Nader Hashim (Chair)]: I know we've got people in different areas. You know? It could be I a great build. I just think

[Sen. Christopher Mattos (Clerk)]: Bob's gonna do a really good job at it.

[Sen. Nader Hashim (Chair)]: Well, thank you, Mark Okay. Your testimony, and appreciate it. Okay. Yeah.

[Mark Langen]: Thank you. Good.

[Sen. Nader Hashim (Chair)]: I I foresee this coming out of our committee.

[Mark Langen]: Yeah. Me